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Negative Equity Mortgages

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Negative equity mortgages are not an Irish jokeUK lenders do them tooThree Irish lenders are launching negative equity mortgages but many UK banks and building societies are already offering them. They're just not shouting about it

Lenders in Ireland are planning to launch "negative equity" mortgages for homeowners, it was announced last week, prompting speculation that there could be a return to such lending in the UK.

Negative equity mortgages allow people to move house despite owing more than their current home is worth. The state-backed Irish Nationwide, Bank of Ireland and Permanent TSB are all preparing to launch the products, according to the Irish Independent newspaper, allowing homeowners to move straight into negative equity but in a new location. Mortgages that allowed households to do this were available from some UK lenders in the 1990s, but since then all except one have been withdrawn.

Nationwide introduced a negative equity loan last year for existing customers. The building society will lend 95% of the price of the new property to customers in negative equity who want to move, plus up to £30,000 of their negative equity.

So, someone wanting to move from a £200,000 house with a mortgage of £220,000 would be £20,000 in negative equity. If they wanted to move to a property costing £250,000, the Nationwide loan would allow them to carry forward the £20,000 negative equity, and lend them 95% of the £250,000 required to buy the new home, producing a total loan of £257,500 – £7,500 more than the new property's value.

The rates on the loan are pretty onerous: on the main loan up to 95% LTV (loan-to-value), Nationwide is charging 6.38% on a two-year fix, 6.98% for a three-year fix or 7.68% for a five-year fix, all with a £896 fee. The top-up loan covering 100%-125% LTV can be taken out only on a three-year fixed rate at 7.48% or on a five-year basis at 8.18%.

"The mortgage is just there to enable people who really need to move to do so," says a Nationwide spokeswoman. "It has only been taken up by a very small number of existing borrowers."

From a lender's perspective this is actually very sensible, says Ray Boulger of mortgage broker John Charcol. "The key to good mortgage lending is affordability. Lending 100%-125% to someone who can afford it is much better than lending 25% to someone who can't."

Experts do not believe the situation in Ireland will trigger a more general return to such lending in the UK, however.

"Negative equity mortgages are being considered in Ireland because there have been such significant falls in house prices that many homeowners are finding themselves in negative equity – and therefore trapped in their homes," says Melanie Bien of mortgage broker Private Finance. "There are lenders offering negative equity loans in this country on a case-by-case basis but they are reluctant to go on the record and state that this is their policy ."

Anyone who does face this situation and is not with Nationwide should talk to their existing lender. As Bien points out, many will consider negative equity customers even if they do not publicise this. Santander, Halifax and Barclays, which lends through Woolwich, all say they will consider such cases.

"It is highly unlikely, however, that we will see a return to higher LTV deals such as Northern Rock's Together, where buyers are encouraged to borrow up to 125% of the mortgage amount," says Bien. "This would be irresponsible and would generate negative publicity. But existing Northern Rock customers who opted for such mortgages should not be penalised and should be offered alternative products when they come to the end of their deal."

Boulger agrees. "In the 1990s there wasn't a shortage of mortgage finance. Now this is far less incentive for lenders to do this."

There were signs last week that some lenders are starting to relax their lending criteria, however. Norwich and Peterborough building society increased the LTV it will lend from 80 to 85%. It now has a three-year fix rate at 4.99% on this LTV and a five-year fixed rate at 5.89%. Meanwhile, the merged Co-operative Bank and Britannia halved the fees and reduced the rates on their 90% LTV fixed rate mortgage range. The two-year fixed rate is now at 4.99% and the five-year rate is at 5.89%, both with a £499 fee.


I didn't know these existed. Not sure if its good or bad really, on one hand those stuck in negative equity can still sell and move somewhere cheaper, increasing supply. On the other hand if people use it as it says in the article, to trade up, then it's just more frivilous lending.

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I didn't know these existed. Not sure if its good or bad really, on one hand those stuck in negative equity can still sell and move somewhere cheaper, increasing supply. On the other hand if people use it as it says in the article, to trade up, then it's just more frivilous lending.

On paper the maths makes sense, as it lowers the LTV and lowers the risk.

Ultimately what it does is force the debtor, who uses their savings for the new deposit, to pay down part of the NE with their savings.

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Silly lending is going to end in tears.

Not necessarily - it depends on the new mortgage compared to the person's salary. In the example given, the new mortgage is 220k. That's fine if the person earns 70k, but if they earn 30k then it is indeed silly lending.

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